1
CHAPTER I INTRODUCTION
1.1 Background of Research
United Nations Industrial Development Organization defines Corporate
Social Responsibility (CSR) as a management concept whereby companies
integrate social and environmental concerns in their business operations and
interactions with stakeholders. Based on Act No. 40 of 2007 about Corporation,
Social and Environmental Responsibility is the commitment of the Company to
participate in the sustainable economic development to improve the quality of life
and environmental beneficial for the Company itself, the local community and
society in general. Implementation of CSR in Indonesia is mandatory by
government on Act No. 40 of 2007 about Corporation, Government Regulation
No. 47 of 2012 concerning Social and Environmental Responsibility of
Corporation, and the latest is on Decision of the Chairman of Capital Market and
Financial Institution Supervisory Body (BAPEPAM-LK) No.KEP-431/BL/2012
concerning the Submission of Annual Report by Listed Company.
Some issues arise about the implementation of CSR in Indonesia. One of
it is the issue of transparency on CSR’s disclosure. It is proved by news on RiauSatu.com on April 2015 which stated that “Ketua Pansus CSR berharap
Pemerintah dan Perusahaan Transparan.” The news talked about the
transparency of CSR’s budget and the company’s CSR activities. This issue in line with Kim et al., (2012) statement that CSR is an issue of growing interest, and 1.1 Background of Reesesearch
Unitteded Nations Industrtrial DeD vev lopmp enent Organizationon defines Corporate Social RResponsibilitityy (C(CSSR) asa a managagemmenent t coconcncept wherebby y companies intetegrate sosocicialal and envvirironmental concerns inin ttheir bussininesess s operattioions and interaactcioionsns with h stakeholders. Based on Act No. 40 of 2200007 abboout t CoCorporatation, Socicialal aand EEnvironmental Responsibility is the commitment ofof the CComompany tto pa
partrtici ipatate in the sustainable economic development to improve thee quaalilityyoof flifee anndd ennvvironmental beneficial for the Company itself, the local commmuninitty andnd societyy in general. Implementation of CSR in Indonesia is maandatoryy byy govevernrnment on Act No. 4040 of 2007 about Corpoporaration, Governmentt RReegulatioion n No. 47 of 2012 concerning SoSocicall aand Environmental Responsibilitty y oof Co
Corprporo ation, and the latest is on Decision of the Chairman of Capital MaMarkketetaannd Fi
Finanancciaiall InInststititututioionn SuSupepervrvisisorory y BoBodydy ((BABAPEPEPAPAM-M-LKLK) ) NoNo.KKEPEP 4-4331/B/BL/L/22012 conccererniningngttheheSubSubmimission of Annnnual Repoortrt by ListedCComompanyny.
Some issues arise about t the implemmentation of CSR in Indonesia. One of it is the issue of transparency oon CSR’ss disclosure. It is proved by news on
the reporting of socially responsible activity is becoming more prevalent as
investors, customers, and other stakeholders demand greater transparency about
all aspects of business. When company becomes not transparent in their report, it
will cause information asymmetry between company and the users of their report.
Company generally has responsibility to fulfill not only their
shareholders’ interest but also stakeholders’. Corplaw (2013) define stakeholders
as any person or group which can affect or be affected by the actions of a business
and it is including employees, customers, suppliers, creditors and even the wider
community and competitors. Ekawati (2012) stated that CSR is an activity that
shows the company’s concern to their stakeholders and as a form of responsibility to the activities of the company in term of social, economic environmental. All
information of CSR is reported and disclosed by company in their annual report as
already regulated by government. The information provided is hoped may provide
consideration for stakeholders in making decisions. CSR disclosure considered
increasingly taking a role in the present due to the shift in the concept of profit
which began to lead to the concept of the triple bottom line (profit, planet, people)
initiated by John Elkington and increasingly into the mainstream of business
ethics (Palguna Putra, 2013).
As already said before, implementation of CSR in Indonesia regulated by
government, so the disclosure of CSR also mandatory for all listed company.
Unfortunately, the regulations did not clearly explain about what are social and
environmental responsibility’s items that should be disclosed by a company. Even, the latest regulation in Decision of the Chairman of Capital Market and Financial
Institution Supervisory Body (BAPEPAM-LK) No.KEP-431/BL/2012 only will cause information asymmmetetrry between ccomompap ny and the users of their report.
Company y generally has responsibility to fufulfill not only their shareholderrs’s’ interest but also sstat kekehoh ldlderers’s’. CoC rprplaw (2013) ddefefine stakeholders as anyny person oror groupupwwhihich can affect or be affecctededbby the e actions ofof a business an
and it is innclcududini g emmplployees, customers, suppliers, ccrereditors aandnd eeven thhee wider commmununitity anndd competitors. Ekawati (2012) stated that CSSR R is aann acactitivity tthat shhowows the ccompany’s concern to their stakeholders and as a form ofo resespoponsnsibi ilittyy
to
to tthhe aacctivities of the company in term of social, economic enviroonmeentntalal. All informmation of CSR is reported and disclosed by company in their annnuual reportt ass al
aready regulated by government. The information provided is hoped mmay prprovidde considdeeration for r ststakakeholdersh iin n makingg ddeeciisions. CSCSR R disclosuree consideereredd in
increasingly taking a role in the presesenentt due to the shift in the concept off pprorofifit wh
whicich hbebegagan nto lead to the concept of the triple bottom line ((prp ofofitit,,plplaanetet, pepeopople) in
inititiaiatet d by John n ElElkikinggtoton n and inincrcreaeasisinglyy iintnto ththe e mam instream oof f bubusiness ethics (P(PalalgugunanaPPutra, 2013).
requiring companies to disclose its CSR activities that cover policies, types of
program and cost incurred in four aspects such as environmental; employment
practices, health, and work safety; social and community development; and
product responsibility, still, the items are not too specifics. Thus, the activity and
the disclosure of CSR in Indonesia is still based on company’s decision (voluntary
disclosures). Voluntary disclosures also mean that company disclose beyond what
is mandatory.
Company should balance in fulfilling the interest of shareholders’ and also stakeholders’. It is a good choice for a company to shift their concept from profit concept to triple bottom line concept. But there is one thing that should be
realize by company that Act No. 40 of 2007 chapter 74 clause 2 mentioned that
CSR is the obligation of the company which are budgeted and calculated as
expenses of the company. When expense increase it will affect company’s profit.
Meanwhile, Milton Friedman (1970) in his shareholders theory said that the sole
responsibility of business is to increase profits. Corplaw (2013) also adding that
based on the premise that managements are hired as the agent of the shareholders
to run the company for their benefit, and therefore they are legally and morally
obligated to serve their interest. This is contradicting with the stakeholder theory
which state that the company is not the only entity operates for his own benefit,
and to gain support from stakeholders companies must provide benefits to its
stakeholders. Stakeholder theory suggests the purpose of the firm is to serve
broader societal interests beyond economic value creation for shareholders
alone. So company should handle this problem and must ensure that the
fulfillment of the interest not running unilaterally.
product responsibility, still, theheiittems are notot ttoo specifics. Thus, the activity and the disclosure of CSRSR in Indonesia is still based on compmpana y’s decision (voluntary disclosures))..VVoluntary disclosuurer ssalalsoommeaean ththat company disisclcose beyond what is manndadatory.
Co
Compmpany shhouould balance in fulfilling the iintnterest off sshaharer holderers’ and
also sstatakekehholdderers’. It is a good choice for a company to shifift t theiir r coconcncept frfrom prrofofit concecept to triple bottom line concept. But there is one thingng thaat t shshouould bbe e re
realaliize bby company that Act No. 40 of 2007 chapter 74 clause 2 mmentiiononeded that CSR iis the obligation of the company which are budgeted and cacalculated ass
ex
e pensses of the company. When expense increase it will affect compaany’s pprofitt. Meanwwhile, Miltoonn FrFriiedman ((191970) in hiss shshareholdderrss ththeory said ththat the ssololee r
responsibility of business is to increeasase e profits. Corplaw (2013) also addinng g ththaat ba
basesed donon tthehe ppremise that managements are hired as the ageg nt of f ththee shshararehehololdders to
to rrunun the compapanyny ffoor theheirir benefefitit, andand therefeforo e ththeyey aare legally aandnd mmorally obligatet dd totossererve their interest. TThihs is coontradicting with ththee ststakakeheholder theory which state that the company is not the onlly entity operates for his own benefit, and to gain support from stakehholders coompanies must provide benefits to its stakeholders. Stakeholder theory sugggeststs the purpose of the firm is to serve
Both CSR and profit (earnings) information are represented in annual
report and financial statements of the company. Investor, creditor and
stakeholders use this information as based information for their decision-making
process. Therefore, the quality of the company’s annual report and financial statement plays an important role in the communication process for the transfer of
information from the company to users of annual report and financial statement
because it will affect their decision-making process.
All information in annual report or financial statements should be
presented transparently to the users. Yeh et al., (2014) stated that managers
usually have better or timelier information than investors. Thus, managers have
incentives to withhold private information for their self-interest and to practice
diversion of resources because of conflicts of interest principles and agents. This
will lead to information asymmetry between company and the users of annual
report or financial statement. When asymmetry is high, stakeholders do not have
sufficient resources or access to relevant information to monitor manager’s
actions. It leads to creation of opportunities for earnings management practices
(Richardson 1998 in Sanjaya and Young. 2012).
Information asymmetry is a condition describing that managers have
access to information on the company’s prospects which are not owned by outside
parties (Sanjaya and Young, 2012). Lang and Lundholm (1996) in Yeh et al.,
(2014), find that companies are more likely to make voluntary disclosures when
information asymmetry between the company and investors is severe. Yeh et al.,
(2014) adding that increased voluntary disclosure can effectively reduce
information asymmetries among management and stakeholders. Sanjaya and process. Therefore, the quallitityy of the commpapany’s annual report and financial
statement plays an iimmportant role in the communicationnpprocess for the transfer of information frfrom the companyy to o ususerrs s ofof aannnual report and ffini ancial statement becausseeit will affecttttheeiri ddecision-making procecessss.
Al
All l ininfof rmatatioion in annual report or financncial statatememenents shooulud be presenenteted d trannssparently to the users. Yeh et al., (2014) sstat ted ththatat mmanaggers ussuaually haavve better or timelier information than investors. Thus, maananagegersrs havve e in
incecentivvees to withhold private information for their self-interest annd too prpraca tice diversiion of resources because of conflicts of interest principles and aagents. Thhiss wi
wll leead to information asymmetry between company and the users of anannuaal reportt oor financiaall ststatatement. WWheh n asymmemetrtry is higi hh, sstatakeholders ddo not hhavavee su
s fficient resources or access to rerelelevant information to monitor mananageger’r’s ac
actitions.s IItt leleads to creation of opportunities for earninggs managegemement ppraractcticices (R
(Ricichahardson 19988iin n SaSanjnjayaya aand YoYounung.g.22012))..
Young (2012) also stated that the increasing on presentation of voluntary
disclosure, information asymmetry can be reduced so that earnings management
can be prevented. When the practices of earnings management prevented it will
affect to the increasing of earnings quality.
Ball and Shivakumar (2005) in Yeh et al., (2014) stated thar earnings
quality refers to the level of faithful representation of the features of a firm’s
fundamental earnings processes that are relevant to specific decision making by
investors, creditors, managers, and all other parties contracting with a firm.
Quality of earnings is important because investors rely on earnings information to
evaluate information risks related to a firm (Francis et al. 2004; Ng 2011 in Yeh at
al., 2014). Higher quality of earnings indicating that information that use by users
of annual report and financial statements are relevant and reliable as the based
information in decision-making process.
Many researches already test about the influence of disclosure to
earnings management or disclosure to earnings quality, and they have the same
results which is disclosure negatively influence earnings management and
positively influence earnings quality (Zhou and Lobo, 2001; Yeh et al., 2014;
Sanjaya and Young, 2012; Blanco et al., 2014). Many researchers also research
about the link between CSR and earnings quality or CSR and earnings
management, and the results is mix (Kim et al., 2012; Ekawati, 2012; Isyanto,
2014; Hong and Andersen, 2011; Chih et al., 2008; Arief, 2014; Palguna Putra,
2013).
Based on those arguments, writer attracted to test the influence of level of
CSR disclosure to earnings quality. This research will use discretionary accrual of affect to the increasing of earnnininggs quality.
Ball and SShhivakumar (2005) in Yeh et al., (2201014) stated thar earnings quality refeferrs to the level of ffaaiththfuful rereprpreesenentaattion of the feaatutures of a firm’s fundamamental eaarningss pproroccesses that are relevant ttoo spspecificc decision n making by innvestors,, ccreredidittors, mmanagers, and all other partieiess contraactctining g with aa firm. Quallitityy ofof earninings is important because investors rely on eararninngssininfoformrmatioonn to evvalaluau te infnformation risks related to a firm (Francis et al. 2004;NNg g2001111iin nYeY h aat al
al.,. 220144). Higher quality of earnings indicating that information thatat useebby y users of annnuual report and financial statements are relevant and reliable aas the basseded in
informmation in decision-making process.
Manyy rreseseaearcrchehess alalrer adady y test aabboutut tthehe iinfnfluluenencece of disclosuree ttoo ea
earnings management or disclosure toto earnings quality, and they have thehe ssamame re
resusultlts s whhicichh isis ddisisclclososururee neganeg tively iinfnfluluenencece earearniningngss mmanagegemementnt and po
earnings management as the proxy of earnings quality and also will use
companies in mining sector that listed in Indonesia stock exchange year
2012-2014 as the sample of research.
1.2 Research Question
Based on background that explained above, thus, the research question
can be formulated as follow:
Does the level of corporate social responsibility disclosures influence earnings
quality?
1.3 Objective of Research
The objective of this research is to give empirical evidence the influence
of level of corporate social responsibility disclosure to earnings quality on
Indonesian mining companies that listed on IDX year 2012-2014
1.4 Contribution of Research
This research is expected to give contribution as follow:
1. As academic purpose, this research is to test the influence of level of
corporate social responsibility disclosure on earnings quality in Indonesia
especially in mining sector.
2. As managerial purposes, this research is expected to help users of financial
statements to more thoroughly understand the performance of the company
as a basis for making decisions and also is expected to provide input to the
regulator, in here government, as a basis for the creation of a new policy
relating to CSR and earnings management practices in Indonesia. 1.2 Research Question
Based onon background that explained above, thuss, the research question can be forrmmulated ass folollolow:w
Doeses the levelel oof corporattee sosociial responsibl ibililitity y disclosureres s ini fluence e earnings q
qualitty?y?
1.33ObObjej ctivive of Research
The objective of this research is to give empirical evidencee the iinfnfluluence of leveel of corporate social responsibility disclosure to earningss quality oonn In
I doneesian mining companies that listed on IDX year 2012-2014
1.4 Contributiononooff Research
Th
This research is expected to give contriribbution as follow: 1
1. AsAs aacacadedemimic c pupurpposose,e, tthihiss rer seeararchch iiss toto ttesest t ththee ininflflueuencncee ofof lleveveel of co
corprpororatatee soocicialal responsibibility discloossure on eaarnrningss qquaualilityty iin InIndonesia especially in mining sectoor.
1.5 Systematic of Writing
Research was prepared by systematic as the following:
CHAPTER I: INTRODUCTION
Chapter I contain an introduction in the preparation of the research, which consist
of background, formulation of the problem, research objectives, research
contribution, and systematics of writing.
CHAPTER II: THEORETICAL BACKGROUND AND HYPOTHESIS
DEVELOPMENT
Chapter II contains literature review outlines the theoretical basis and previous
research to be used as a reference for data analysis study in this study. This
chapter also includes a conceptual framework for hypothesis development that is
being proposed in this research.
CHAPTER III: RESEARCH METHODOLOGY
Chapter III includes an operational definition of each variable and how
measurement, data collection methods, population and sample used in this
research, as well as the sampling techniques criteria used, and data method
analysis.
CHAPTER IV: DATA ANALYSIS AND DISCUSSION
Chapter IV contains the results of processing and data analysis, whether the
results is able to meet and prove the proposed hypothesis or not. Further
discussion on the result of statistical analysis will be included as well.
CHAPTER V: CONCLUSION
Chapter I contain an intntrroduction in the preparationoof fthe research, which consist of background,d, formulation oof the problem, research obo jectives, research contributition, and syststemmatatici s offwwrirititingng.
CHHAAPTER R IIII: : THEOORERETTICAL BACKGRGROUOUND AANDND HYPOTOTHESIS DEVEVELOLOPMPMENNTT
Chhaapter II contains literature review outlines the theoretical basasis aandnd ppreviouus re
reseseaarchh to be used as a reference for data analysis study in thiis stutudydy. This chapterr also includes a conceptual framework for hypothesis developpment thatt iss
be
b ing proposed in this research.
CHAPPTTER III:RRESESEEARCH MEMETHT ODOLLOGOGY
Ch
Chapter III includes an operationaal l definition of each variable anndd hohow me
measasururemement,t, ddata cot collllecectitionon methods, m , popopupulalatitionon andnd samplple ususeded iinn this reeseseararchch,, asas welwell l as tthehe sammplpling tectechniququees cririteterira usedused, anandd dadatata mmethod analysis.
CHAPTER IV: DATA ANALYSSIS AND DDISCUSSION
Chapter V contains the final conclusion to answer research questions. Disclosing
the limitations of the study as well as suggestions given for further research will
